SCHP ETF: Your Shield Against Inflation in a High-Rate World

Inflation remains a persistent threat to portfolios, even as central banks pivot toward rate cuts. For investors seeking to protect capital while navigating a high-rate environment, the Schwab U.S. TIPS ETF (SCHP) emerges as a standout option. This low-cost ETF offers three compelling advantages: a proven inflation-adjusted mechanism, outperformance versus broad bond indices in 2025, and a strategic duration profile that minimizes rate sensitivity. Here's why it belongs in your portfolio.

1. Inflation-Adjusted TIPS: The Built-In Hedge

SCHP tracks the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) Index, which holds bonds whose principal value is adjusted monthly based on the Consumer Price Index (CPI). This mechanism ensures that the ETF's underlying holdings grow in value as inflation rises, shielding investors from the eroding purchasing power of traditional fixed-income assets.

Unlike conventional bonds, TIPS' semi-annual interest payments are calculated using this adjusted principal. For example, if CPI rises 3% in a month, the principal of a $1,000 TIPS bond becomes $1,030, and interest is paid on this higher amount. This dual protection—both principal and interest—makes SCHP uniquely positioned to thrive in inflationary environments.

2. Outperforming Broad Bonds in 2025

While the Bloomberg U.S. Aggregate Bond Index (tracked by ETFs like SCHZ) struggled with volatile interest rates in early 2025, SCHP surged ahead. As of June 2025, SCHP delivered a +3.28% year-to-date return, outperforming the Aggregate Index's +1.86% and its peers like the iShares TIPS Bond ETF (TIP). This outperformance isn't a fluke:

• Rate Environment Resilience: The Aggregate Index's heavy weighting in long-duration Treasuries and mortgage-backed securities made it vulnerable to rate fluctuations. SCHP's focus on shorter-duration TIPS (average maturity of ~6 years vs. ~8 years for the Aggregate) reduced its sensitivity to rising rates.
• Inflation Tailwinds: Even with the Fed's expected rate cuts in 2025, inflation remains above the 2% target. SCHP's TIPS holdings directly benefit from this, while traditional bonds face headwinds from coupon reinvestment at lower rates.

3. Duration Advantage for Capital Preservation

Duration, a measure of interest-rate sensitivity, is critical in high-rate environments. SCHP's shorter duration profile (currently ~5.2 years) contrasts sharply with the Aggregate Index's ~7-year duration. This means:

• Less Volatility: For every 1% rise in rates, a 5-year bond's price drops ~5%, versus ~7% for a 7-year bond. SCHP's lower duration cushions against rate-induced losses.
• Strategic Flexibility: In 2025, the Fed's slower-than-expected pivot to cuts kept rates elevated longer than anticipated. SCHP's shorter duration allowed it to avoid the prolonged pain felt by longer-duration bond funds.

Morningstar's Gold Stamp of Approval

SCHP's success isn't just about timing—it's about consistent execution. The ETF holds a Morningstar Gold Rating, reflecting its strong risk-adjusted returns over five and ten years. With a 0.03% expense ratio, it's one of the cheapest TIPS ETFs, outpacing peers like TIP (0.20%) and SPDR Portfolio TIPS ETF (SCHP's sibling, but with a 0.08% fee).

The Bottom Line: Diversification at Its Best

SCHP isn't just an inflation hedge—it's a core diversifier for fixed-income portfolios. Its low correlation to stocks and traditional bonds reduces overall portfolio volatility. For example, during the 2023 bond market slump, SCHP's worst drawdown was -14.26%, but it rebounded swiftly as inflation fears receded.

Investors should allocate 5-10% of their bond sleeve to SCHP to balance exposure to inflation risk and rate sensitivity. Pair it with short-term Treasury ETFs (e.g., SHY) or multi-sector bond funds for a well-rounded strategy.

Final Take

In a world where inflation and interest rates are twin challenges, SCHP offers a rare blend of protection, performance, and affordability. Its TIPS mechanism, 2025 outperformance, and duration discipline make it a must-have for portfolios aiming to stay ahead of rising costs—and the next rate cycle.

Invest wisely, and keep roaring.